Microsoft (MSFT) Archives - the patient investor %

Conclusion

The market is growing risk-averse as the Fed starts to taper. But financial markets are still awash with cash.

Buying is likely to be concentrated in the heavyweights.

Apple (AAPL), Alphabet (GOOGL), Amazon (AMZN), Meta Platforms (FB), and Microsoft (MSFT)

Small caps could possibly accelerate into a down-trend but reversal of large cap indices is unlikely with so much liquidity.

Colin Twiggs

Colin Twiggs is a former investment banker with almost 40 years of experience in financial markets. He co-founded Incredible Charts and writes the popular Trading Diary and Patient Investor newsletters.

Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.

Focusing on interest rates and financial market liquidity as primary drivers of the economic cycle, he warned of the 2008/2009 and 2020 bear markets well ahead of actual events.
He founded PVT Capital (AFSL No. 546090) in May 2023, which offers investment strategy and advice to wholesale clients.

All five US technology behemoths — Apple (AAPL), Amazon (AMZN), Alphabet (GOOGL), Facebook (FB) and Microsoft (MSFT) — show strong up-trends over the past 6 months, boosted by strong inflows from international investors who are giving the bond market a wide berth.

But the canary in the coal mine is Tesla (TSLA), the darling of retail investors and the largest holding in Cathy Wood’s ARK Innovation Fund (ARKK). TSLA encountered resistance at 700 and looks ready for another test of primary support. Breach of 550 would signal a primary down-trend.

Trading at more than 17 times sales (TTM Q1 FY21), Tesla shows spectacular exponential growth in revenues over the past ten years. But investors should be wary of extrapolating that growth as heavyweights like Volkswagen, Ford and GM invest heavily in the EV space.

Also, free cash flow is patchy, reaching $3.4 billion in FY20 on a levered basis.

That starts to look anemic when one takes into account stock compensation of $1.7 billion — which does not affect cash flow but dilutes existing stockholders. Adjusted free cash flow, net of stock compensation, is $1.7bn. Against market cap of $621bn that gives an earnings multiple of 365 times!

If we take adjusted free cash flow for the trailing 12 months to March 2021, of $1.4bn, that gives an even higher multiple of 443 times.

Conclusion

Valuations of stocks like Tesla (TSLA) are precarious and breach of primary support levels could spark a flurry of margin calls.

Notes

Revenue and cash flows are from SeekingAlpha

Colin Twiggs

Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.

Tag: Microsoft (MSFT)

S&P 500: Small caps diverge

Conclusion

A Tesla in the coal mine

Conclusion

Notes